How to Compute RMD Distribution

If you own an investment retirement account then you are probably familiar with the term Required Minimum Distribution, or RMD. The Required Minimum Distribution (RMD) refers to the amount that traditional investment retirement accounts pay after the account holder reaches the age of 70.5. While your broker should provide this information for you on your statement, it is always good to understand how to make the calculation yourself.

Instructions

1. Review and learn the formula for calculating RMD by walking through this example. The RMD is calculated by dividing the prior year-end market value of your retirement account by the distribution period. For this example, let's assume you are 70 years old and want to calculate the amount of your RMD for the coming year. The value of your account at year end last year was $1,000,000.

2. Determine the distribution period. This is usually the number of years you will live or "life expectancy." In this case, you have led a healthy life and expect to live to be at least 100 years old. Subtract your current age from the determined life expectancy, 100-70=30. Thirty is your distribution period.

3. Divide the value of your account ($1,000,000) by your life expectancy (30). The calculation is: $1,000,000/30=$33,333.33. You can expect an RMD of $33,333 per year if you live to be 100.

Tips & Warnings

• Defer your RMD until you retire. Some investment plans allow you to defer receiving RMDs until after you retire, even if that's after 70.5. If you decide to retire at 75, that shaves 5 years off your distribution period. The new calculation is $1,000,000/25=$40,000 per year.

References

• Investopedia: Required Minimum Distribution--RMD